The mortgages that are purchased by Freddie Mac and Fannie Mae are then bundled together and sold as securities to investors.  The proceeds that result from selling the securities are then used to once again purchase more mortgages from lenders.  The entire process helps to provide both stability and liquidity to the financial and housing markets.  It provides the means for the origination of more loans and also helps to keep interest rates relatively low for borrowers.  Over half of all U.S. home loans are guaranteed by Freddie Mac and Fannie Mae, totalling over $5 trillion.

The secondary mortgage market was created during the Great Depression to respond to the housing crisis.  Due to the run on the banks and financial uncertainty, loans were not being originated.  Fannie Mae was formed in 1938 and was charged with buying mortgages from lenders and then reselling them to investors.  The ultimate goal was to make home ownership more widely available and affordable to more Americans.

Investors flocked to the securities due to the fact that they had the backing of the federal government as well as the strong underwriting standards.  Fannie Mae was privatized in 1968 due to the financial pressures caused by the Vietnam War, and in 1970 Freddie Mac (Federal Home Mortgage Corporation) was formed to compete with Fannie Mae.

Freddie Mac and Fannie Mae are government entities that are backed by the federal government, exempt from local and state taxes and have a line of credit with the Treasury Department.  Fannie Mae and Freddie Mac securities have historically been popular with investors due to the government backing which has helped to keep interest rates low and provide additional liquidity to the financial markets.

During recent years Freddie Mac and Fannie Mae became more involved in sub prime lending and took on higher risk mortgages.  During the recent sub prime mortgage crisis many of the mortgages ended up in foreclosure and the value of the Freddie Mac and Fannie Mae securities fell drastically.  This resulted in a housing and financial crisis.  The federal government intervened, and in the fall of 2008 Freddie Mac and Fannie Mae became conservatorships of the federal government.

One of the major financial indicators that lenders use in assessing risk is the loan to value ratio.  This financial ratio is a measurement of the proportion of loan amount to the recent sales price or appraised value of the property.  This financial ratio is derived by dividing the amount of the loan by the property’s value.  If the loan is for $80,000 and the property value is $100,000, the loan to value ratio is 80%.  The lower the loan to value ratio is, the more risk there is for the lender.

Another financial ratio used to evaluate risk is the combined loan to value ratio (CLTV).  This financial ratio measures the proportion of all the loans associated with the property versus the property’s value.  This ratio is useful if there is more than one loan (or lien) on the property.  There could be a home improvement loan or second mortgage in addition to the original mortgage.  To find the combined loan to value ratio, the amounts of all the loans are added together and then divided by the property’s value.

A higher down payment or larger equity in the property will result in a higher loan to value ratio and lower risk for the lender.  Mortgages with down payments of less than 20% will usually require the borrower to carry private mortgage insurance because of the higher risk.

Low loan to value ratio loans will require a better credit rating and have higher interest rates than high loan to value ratios.  Larger down payments will be required from higher risk borrowers.

When applying for a mortgage it is critical to understand how lenders evaluate and measure their risk in approving your loan.  The larger your down payment, the less risk the lender has to take.  In case of default, there will be more equity in the property than there would be on a loan with a low down payment.  In the event of a default on the property, the equity will help to offset any potential loss the lender may incur.  Therefore, the loan to value ratio plays an important role in the lender assessing their risk and approving your loan.

A car loan is another example of a secured loan.  The car is the collateral for the loan.  If the borrower does not make his or her car payments the lender has the legal right to repossess the car and sell it.  Secured loans generally have lower interest rates than unsecured loans due to the fact that there is collateral backing the loan.  The drawback to a secured loan is that you could potentially lose the collateral if you are unable to repay the loan.

Unsecured loans do not have any collateral acting as security on the loan.  The agreement is based on your promise to repay the loan to the borrower.  Unsecured loans are higher risk and come with much higher interest rates than secured loans.  One example of an unsecured loan is a credit card.  You do not have to put up any collateral in order to get a credit card, but you do need to go through an approval process where you income is verified and your credit history is checked.  The interest rate you pay will largely determined by your credit rating as well as your repayment history on previous loans.

Most major purchases such as a home or car usually require a secured loan.  You have use of the car and home as long as you make your payments on time.   Once you have the loan paid off the lien on the home or car is lifted and you own them outright.  If you fail to makes your payments and default on your loan, the lender has the right to take back the home or car and sell it in order to recover on the loan.

As an active real estate investor, managing the daily operations of property investments can be quite time consuming and labor intensive.  You will need to deal with tenants, repairs, maintenance, improvements and other aspects of managing property.  Active property investors also do not have the same opportunities to diversify their real estate investment portfolios to the same degree that a passive investor does investing in real estate investment trusts (REITs).

One advantage to being an active real estate investor is that you select the properties you want to invest in, whereas a passive real estate investor generally leaves that up to professional managers.  The big advantage to being an active real estate investor is that you have more control over the properties and can use your time and talents to improve the properties, thereby having the opportunity to earn a greater return than you might as a passive investor.  There are various forms of active real estate investment such as renting out property, developing land or flipping properties for quick profits.

A passive real estate investor does not buy and manage the properties directly but rather invests in a real estate partnership, limited liability company (LLC)  or real estate investment trust (REIT).  The advantage here is that the passive investor does not have to worry about the day to day management of the properties.  Another advantage to being a passive real estate investor is liquidity.  Real estate itself is an illiquid asset.  However many REIT shares are publicly traded, so the investor can sell them for cash, whereas an active real estate investor must sell the property itself.  Passive investing also has the benefit of diversification where an investor can invest in a partnership or REIT and have partial ownership in a variety of properties.

The major disadvantage of being a passive real estate investor is lack of control.  The passive investor does not actively pick the specific properties to invest in and does not have the opportunity to make direct improvements or add value to the properties through their own efforts.  This can result in lower profits than active real estate investing.

As an active real estate investor, managing the daily operations of property investments can be quite time consuming and labor intensive.  You will need to deal with tenants, repairs, maintenance, improvements and other aspects of managing property.  Active property investors also do not have the same opportunities to diversify their real estate investment portfolios to the same degree that a passive investor does investing in real estate investment trusts (REITs).

One advantage to being an active real estate investor is that you select the properties you want to invest in, whereas a passive real estate investor generally leaves that up to professional managers.  The big advantage to being an active real estate investor is that you have more control over the properties and can use your time and talents to improve the properties, thereby having the opportunity to earn a greater return than you might as a passive investor.  There are various forms of active real estate investment such as renting out property, developing land or flipping properties for quick profits.

A passive real estate investor does not buy and manage the properties directly but rather invests in a real estate partnership, limited liability company (LLC)  or real estate investment trust (REIT).  The advantage here is that the passive investor does not have to worry about the day to day management of the properties.  Another advantage to being a passive real estate investor is liquidity.  Real estate itself is an illiquid asset.  However many REIT shares are publicly traded, so the investor can sell them for cash, whereas an active real estate investor must sell the property itself.  Passive investing also has the benefit of diversification where an investor can invest in a partnership or REIT and have partial ownership in a variety of properties.

The major disadvantage of being a passive real estate investor is lack of control.  The passive investor does not actively pick the specific properties to invest in and does not have the opportunity to make direct improvements or add value to the properties through their own efforts.  This can result in lower profits than active real estate investing.

The reason that these guidelines are important is that conforming loans can be resold to Freddie Mac and Fannie Mae and jumbo loans cannot.  Conforming loans have lower interest rates.  It is very advantageous for lenders to be able to resell the mortgages to Freddie Mac and Fannie Mae, as it frees up their funds and allows them to originate more mortgages.  Freddie Mac and Fannie Mae purchase mortgages from savings and loans, banks and other lenders and then package them together and offer securities for sale to investors.  The proceeds from the sales are then used to purchase more mortgages. 

Because jumbo loans cannot be purchased by Freddie Mac and Fannie Mae, lenders must either carry these mortgages on their books or find private investors or investment groups to purchase them.  These loans are higher risk for lenders than conforming loans and therefore come with higher interest rates.  In the past, large investors like Merrill Lynch and Citicorp purchased these jumbo loans in the form of mortgage-backed securities which were then sold to hedge funds, pension plans and other institutional investors.  However, these opportunities are practically non-existent in today’s financial climate.  In most circumstances, lenders must carry these loans on their books and therefore are not originating as many jumbo loans.

Due to the tightening credit conditions, it is very important for borrowers to meet the established criteria set forth in the guidelines issued by Freddie Mac and Fannie Mae.  Borrowers with poor credit and high debt-to-income ratios may not always qualify for conforming loans.  In these circumstances the borrowers may be forced to seek a loan from portfolio lenders.  Portfolio lenders do not sell their loans in the secondary market.  They are high risk loans and carry high interest rates.  The difference in interest rates between conforming and jumbo loans has widened during the recent financial crisis and tightening credit conditions.  The federal government has recently passed legislation to help borrowers in areas where home values are high so that they can meet the loan amount criteria for conforming loans.

Term life insurance is for a person who is looking for low cost insurance coverage for a specific period of time.   The individual can choose the period of time they would like to have insurance coverage for.  This could be a term of anywhere from a year up to thirty years or more.  Once the term expires, the insured can either discontinue the policy or renew it.  If they decide to renew they may pay a higher premium based on their age, health or other factors.

If the insured dies within the term that is covered by the insurance policy, the death benefit will paid to the insured’s beneficiaries.  If the insured dies after the life insurance term has expired, no benefit will be paid.

Term life insurance is generally the least expensive type of life insurance.  There is no cash value to recover, it is straight coverage to pay a death benefit to the beneficiary in the event that the insured dies within the term period.

This form of life insurance is best suited for someone who is looking for inexpensive life insurance coverage for a specific period of  time.  Some people may want to invest in term life insurance while their children or young or have other obligations.  Others may invest in term insurance to pay for funeral or other specific expenses in the event of their death. 

The advantages of term life insurance are that it is affordable, renewable, flexible and easy to understand.  When the term life insurance coverage expires the insured has the option of reviewing their situation and renewing the policy, although they may end up paying higher premiums by doing it this way.  With whole life and other forms of insurance, the premium does not continue to rise each year the way it does with term insurance.  Many insurance companies also allow the insured to convert their term life insurance into a whole life insurance policy.  Therefore, a term life insurance policy does afford a great deal of flexibility which allows the individual the opportunity to review their financial and life circumstances and adjust their life insurance needs accordingly.

Private mortgage insurance is usually .5% to 1% of the amount of the mortgage.  On a $200,000 mortgage, the private mortgage insurance would cost $1,000 to $2,000 a year.  This adds quite a bit to the cost of the mortgage and monthly payments.

There is an option for borrowers who cannot afford a large down payment called a piggyback loan.  These loans are basically second mortgages that can be used to help a borrow avoid having to pay for private mortgage insurance.  As an example, if the borrower can only afford a 10% down payment on a $200,000 mortgage, the down payment would be $20,000.  The borrower would then take out a piggyback loan for the remaining $20,000 in order to come up with the 20% down payment, and thus avoid having to pay for private mortgage insurance. 

Since private mortgage insurance does not contribute towards paying down a mortgage and is not considered interest, it can be more advantageous to take out a second loan instead of paying for private mortgage insurance.  The other main option for avoiding private mortgage insurance is to take out a smaller mortgage where you can afford a 20% down payment.

On loans that do require private mortgage insurance, the insurance must be carried until at least 20% of the mortgage principle has been paid.  Once that obligation has been fulfilled the borrower can request that the private mortgage insurance be discontinued.    Another option for getting rid of private mortgage insurance is to refinance the mortgage loan.  However, the disadvantage of refinancing is there will be closing costs associated with taking out a new loan.

For example, an investor may decide to invest $50 a month in a mutual fund.  The number of shares that an investor can buy with the $50 will depend on the current price of the mutual fund shares.  When prices are high the investor will only be able to buy a few shares, but when the price drops he or she will be able to buy more shares. 

When done over the long term, dollar cost averaging helps to ensure that the investor is not always buying shares when prices are high.  It takes a lot of the risk and guesswork out of investing.  Instead of trying to always buy low or time investments, the investor diligently invests at regular intervals.  This long term, steady approach can be quite profitable.

Many mutual funds and investment firms allow investors to use dollar cost averaging by setting up automatic investment plans.  The investor can specify how much they want to invest each month and that amount can be automatically withdrawn from their checking account.  The money is then invested into the mutual fund or other investment.  By making this process automatic, the investor doesn’t forget to make purchases on a regular basis and derives the benefit of dollar cost averaging.

Getting started with dollar cost averaging is easy.  First you need to decide how much you can afford to invest each month.  Make sure you will be able to invest this amount on a consistent basis to take full advantage of dollar cost averaging.  Next, you need to choose your investment.  This should be an investment that you want to hold long term (at least five to ten years).  Mutual funds are good investments for dollar cost averaging because it is easy to set up an automatic withdrawal.  A mutual fund also gives you the advantage of diversification.  Dollar cost averaging will help you to reduce your market risk and a mutual fund can help you reduce company specific risks.  Combine that with steady, consistent investments and you build up a very nice investment portfolio.

You can hire a debt settlement company to help you or you can contact your lenders on your own and attempt to do the negotiations yourself.   Debt settlement companies do have the experience in dealing with debt settlements and also have established contacts with many creditors.  These companies can often negotiate a debt settlement rather quickly.

If you choose to hire a debt settlement company to represent you, you will be required to sign a limited power of attorney.  This gives the company the legal abiment with your creditors they will assist you in setting up an affordable payment plan.  You will send a monthly payment to the debt settlement company and they will disburse money to your creditors according the settlement that has been reached.  Once you have paid the full amount that was negotiated your debts will be considered paid in full.  The entire settlement process can take anywhere from twelve to sixty months, depending on your level of debt and the amount of the payments you make each month.

You can also try to negotiate a debt settlement on your own.  In this case you will need to contact each of your creditors and attempt to negotiate with them to reduce the amount you owe.  You may be able to negotiate reductions on your own up to 60% of what you owe. 

Whether you hire a debt settlement company to represent you or decide to negotiate on your own, keep in mind that your creditors benefit from the settlement as well.  If you declare bankruptcy instead they could be left with nothing.

Debt settlements may be reported on your credit report as a settlement which is a negative mark.  The other thing to keep in mind is that if you fail to meet the terms of the settlement, your creditor has the right to pursue legal action against you.